Accountants Ernst and Young failed to provide proper advice when assessing Feltex Carpets Ltd's financial statements, a former chief financial officer for the company has told a court.
Five Feltex directors are on trial at the Auckland District Court accused of failing to make proper disclosures about the company.
The Companies Office says investors were not told about the true state of Feltex, which went into liquidation in 2006.
ANZ has since recouped all its money but investors are still owed about $40 million.
John Feeney, John Hagen, Peter Hunter, Timothy Saunders and Peter Thomas face two charges relating to information provided in the company's 2005 half-yearly financial statements.
The charges have been brought under the Financial Reporting Act. Each accused faces a fine of up to $100,000 if convicted.
The defence began its case on Monday.
Former Feltex chief financial officer Desmond Tolan told the court Ernst and Young failed to identify issues, financial records and statements which required changing in order to meet compliance.
Mr Tolan says the accountancy firm thoroughly reviewed all financial aspects of the company but failed to correct his assessment of an ANZ Bank debt as non-current.
Mr Tolan told the court he urged Ernst and Young to come back with proper financial advice on those statements. He says it was this type of technical compliance which Ernst and Young was expected to pick up on and was paid for.
Under cross-examination Mr Tolan admitted that despite knowing there had been a breach of its banking convenants and that ANZ could call in the company's loan at any time, the information was not reported to investors.
He said the company was wrong not to tell investors the company was close to defaulting on the loan but told the court he did not believe the bank would recall it.
A defence lawyer for three of the directors, Alan Galbraith, says the directors took all reasonable steps based on the financial advice provided by Ernst and Young
